Let me put this in context and give you an assurance. I’m the bloke who decided to start this service and I was born in the early (ish!) sixties, and secondly, I’m not going to try and sell you a pension, honest. If like me, you were born in the 1960s or 1970s it’s likely that recent poor wage growth means you are worse off than your parents were at your age.
You’ll probably continue to fall behind in retirement comfort too, if you don’t start saving. On the other hand, if you’re in your twenties, you have the uncertainty of not knowing when you’ll be retiring. Many people of my age are relying on an inheritance to see them through. But if you can’t rely on that, your only chance to avoid pensioner poverty is to save more now.
The amount you need to save depends on your age; the earlier you start saving the less you have to put away every month. Saving at the beginning of your working life not only means you save more in contributions but more of your money benefits from compounding. You don’t know what compounding is? Einstein no less, described it as the most powerful force in the universe. In essence, you receive interest on interest you have already accrued; it’s a bit like a snowball gathering more and more snow as it gets bigger.
The average person would be thrilled to receive a retirement income of £20,000 a year but most people underestimate just how much they need to save to generate that figure. How much do you think you’ll need? If you said somewhere above £300,000 you’ll be getting warm. Advisers refer to the cost of delay. Assuming you’re starting with nothing, you want to retire at 68, your pension generates a growth rate of 5% a year and you pay 1% in fees, this is how much you need to save a month:
At 20, you will need to set aside £165 a month, for a 30-year-old £275, for a 40-year-old £485, and if you’re 50, you’ll have to save £960 each month. Now, you tell me which sounds best. The power of compounding can be see in the difference in contributions over the years. You have to contribute two thirds more if you start saving at 30 instead of 20, three quarters more if you start 40 instead of 30, and contributions have to almost double if you start saving at 50 rather than 40.
It’s up to you, but at least we’ve armed you with the facts. We hope to start offering a Fiver a Day pension soon but in the meantime, if you’d like some more help in considering your options, please don’t hesitate to get in touch, follow us or go on our newsletter list (right).